Adapt or Die: Lessons Learned from Wall Street

Let experience, not emotions, guide your trading endeavors.

I've been reading the latest installment to the "Market Wizards" series by Jack Schwager titled Hedge Fund Market Wizards: How Winning Traders Win. In a few words, you need to immediately go out and read this book if you haven't already. There are so many great bits of wisdom in there, it is impossible not to greatly improve your overall trading in just a few hours of reading. Think about it: Schwager interviews some of the greatest mind on Wall Street and asks them how they are successful. If you love this game, it is books like this that are simply impossible to put down.

I found the Hedge Fund Market Wizards interview with global macro trader Colm O'Shea to be very insightful -- if for no other reason than I don't pay too much attention to global macro trends in my trading. I'm a short-term trader, and things like that don't necessarily matter as much to me. Nonetheless, there were two things that O'Shea said that really hit home with me, and I'd like to share them with you.

George Soros has the least regret of anyone I have ever met. Even though he will sometimes play up to his public image as a guru who knows what is going on, it is in no sense what he does as a money manager. He has no emotional attachment to an idea. When a trade is wrong, he will just cut it, move on, and do something else. I remember one time he had this huge FX position. He made something like $250 million on it one day. He was quoted in the financial press talking about the position. It sounded like a major strategic view he had. Then the market went the other way, and the position just disappeared. It was gone. He didn't like the price action, so he got out. He doesn't let his structural views on how he believes the market will play out get in the way of his trading. That is what strikes me about really good money managers – they don't get attached to their ideas.

Amen. I do think I'm getting better at this, but there's still plenty of room to improve. The way Colm describes it sums up why Soros is one of the best ever. We've all seen traders or friends who get way too emotional on trades, with the majority of the time those being a losing trade. We say to ourselves: The market has to be wrong -- there's no way it is going lower. Well, the market doesn't care what you think and price action is all that matters. Accepting this and quickly moving on to the next opportunity is something that is necessary to be successful. That's easier said than done, but it's something to be aware of if you want to make the next step at successfully trading.

Traders who are successful over the long run adapt. If they do use rules, and you meet them 10 years later, they will have broken those rules. Why? Because the world changed. Rules are only applicable to a market at a specific time. Traders who fail may have great rules that work, but then stop working.

I love that word adapt. I've been trading for over a decade and things have changed so much. If you had an "edge" a few years ago, there's an above-average chance it doesn't work anymore. As traders, we always need to be on the lookout for ways to improve. And the number one way to do this is to be aware of things that used to work that aren't working anymore. Don't keep trying to make them work. I did that as the market crashed in 2008. I got my butt kicked, but I learned some valuable lessons. Mainly that the market is very cruel and will take your money if you don't adapt, move on, and find another way to make money. As I've said in numerous presentations over the years, "There's no wrong way to make money." Find what works for you, and exploit it. Then, once it stops working, find something else that does. To sum this all up very bluntly: Adapt or die.